There are many drivers for consolidation of Saudi companies but significant challenges exist, says a study.

The study by NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager, said vertical consolidation is more likely than horizontal, with industrial sectors more likely to see the vertical form, while consumer focused sectors are more likely to undergo horizontal consolidation.

The report studies the consolidation outlook for specific sectors in Saudi Arabia and the likelihood of Saudi companies consolidating domestically and internationally.

“Overall, we find that there are many compelling reasons for leading Saudi companies to take part in consolidation both domestically and internationally,” said Farouk Miah, acting head of equity research at NCB Capital.

“However obstacles to this are high. These include the high family ownership of companies, access to financing, and government subsidies, which limit the incentives to consolidate.”

In many sectors, according to the report, key listed companies may find it beneficial to acquire companies further up or down on the vertical chain of their respective sector. NCB Capital believes vertical consolidation is more likely than horizontal, not particularly due to the greater benefits of this form, but rather due to the fewer obstacles it entails.

“Horizontal consolidation is more likely in consumer areas,” added Farouk Miah. “Retail, Food & Agriculture and Insurance are key sectors in Saudi Arabia which we believe have a high likelihood of horizontal consolidation. The low margins, fragmented and highly competitive nature of the sectors, coupled with high operating costs are some of the key drivers for consolidation in these sectors.”

However, vertical consolidation is more likely in industrial sectors. “From our analysis, we believe vertical consolidation is more likely for Saudi companies in industrial/manufacturing sectors such as Cement and Petrochemicals, as well as technology sectors such as Telecoms,” said Miah. “In these areas, we believe the control of suppliers, as well as the potential from cost synergies and revenue diversification, are key drivers for consolidation.”

NCB Capital believes the outlook for overall consolidation within the kingdom in the cement sector is limited due to the high returns and margins all companies are able to generate. This is largely off the back of the high subsidies provided by the government. Vertical consolidation is much more likely as cement companies seek different revenue sources and increase their strength in the sector.
NCB Capital believes the telecom sector is unlikely to see much consolidation in the short-to-medium term. However, given the limited success of new telecoms players such as Etihad Atheeb, in the long run there may be some scope of telecom companies working together.  –TradeArabia News Service